The exercise price of stock options granted during the quarter ended December 31, 2007 was equal to the market price of the underlying common stock on the grant date.
There was no aggregate intrinsic value as of December 31, 2007. Intrinsic value represents the pretax value (the period’s closing market price, less the exercise price, times the number of in-the-money options) that would have been received by all option holders had they exercised their options at the end of the period.
The Company has recorded the warrant instruments as equity in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, paragraph 11(a), and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.
The following table summarizes information about warrants outstanding at December 31, 2007:
The Company may from time to time reduce the exercise price for any of the warrants either permanently or for a limited period or extend their expiration date.
For the twelve month periods ended September 30, 2007 and 2006, the Company incurred net operation losses and accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At September 30, 2007, the Company had approximately $2,972,040 of accumulated net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2022.
As shown in the accompanying financial statements, the Company has accumulated net losses from operations from inception through December 31, 2007 totaling $3,156,766 and as of December 31, 2007, has had limited revenues from operations. These factors raise substantial uncertainty about the Company’s ability to continue as a going concern.
The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
For the quarter ended December 31, 2007, our largest customer accounted for approximately 82% of sales.
In March 2006, the Company began a lease for approximately 1,800 square feet of office space. The lease extends through February 28, 2008 at a rate of $2,250 per month. Future maturities associated with this commitment are as follows:
As part of the consideration for the purchase of XSVoice, the Company assumed the principal balance of a November 5, 2004 note that was in default between XSVoice, Inc. and one of its carrier partners. The principal balance of the note at the time of the acquisition of XSVoice, Inc. was $113,500 and it carries an interest rate is 5% above the prime rate and is subject to an additional 2% after any Event of Default. The Company has been unable to identify any parties within the carrier that are aware of the note and are thus able to negotiate terms. The carrier has also made no attempts to collect the note and the Company determined during the quarter ended December 31, 2007 that the Note was not going to be collected and wrote off the full amount of the Note to other income and expense. The Company had carried the note as long-term and was not accruing interest.
On August 9, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mobile Greetings, Inc., a California corporation (“MGI”), and UpSNAP Acquisition Corp., a California corporation and a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will be merged with and into MGI, with MGI continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). MGI is a private corporation engaged in providing content to the mobile phone industry. On January 14, 2008, the Merger Agreement was amended to extend the termination date to February 28, 2008. Either party may terminate the Merger Agreement at any time.
Under the terms of the Merger Agreement, at the effective date of the Merger (the “Effective Date”), each issued and outstanding share of MGI common stock (other than any shares held in treasury and any shares as to which the holder has properly demanded appraisal of his shares under California law) will be converted into and exchanged for 9.68 shares (the “Exchange Ratio”) of the Company’s common stock, $.001 par value (“Company Common Stock”). Options, warrants and other rights to purchase MGI common stock as of the Effective Date will be assumed by the Company with an adjustment in the number of underlying shares and the exercise price thereof based upon the Exchange Ratio. The exchange concept is that the shares of Company Common Stock to be exchanged for MGI common stock on a fully diluted basis would equal 50% of the number of outstanding shares of Company Common Stock on a fully-diluted basis immediately after the Merger, and without giving effect to the Private Financing mentioned below.
In addition to the share consideration, the Company is to issue an Non-Negotiable Convertible Note (the “Note”) in the principal amount of up to $2,200,000 to a representative for the holders of the outstanding MGI common stock, options, warrants and other rights to purchase MGI common stock as of the Effective Date, repayable in 12 months subject to a six month extension should the Company then be working on a public offering, together with interest at the rate of federal funds payable at maturity or waived upon conversion. Commencing after six months, the Note would be convertible at a base conversion price of $.50 per share into shares of Company Common Stock, or an aggregate of 4,400,000 shares, subject to customary anti-dilution provisions, after six months. The principal amount of the Note may be reduced by reason of indemnification claims by the Company against MGI and payment of claims of MGI holders under their dissenter’s appraisal rights. The principal amount of the Note also may be reduced in the event the value of the Note could jeopardize the tax-free reorganization of the Merger. In such event, the reduction in principal amount of the Note would increase the number of shares of Company Common Stock issued on the Effective Date based upon the average price of the Company Common Stock for the five consecutive trading days ending on the trading day immediately preceding the Effective Date.
The Company has made customary representations and warranties in the Merger Agreement and agreed to customary covenants, including covenants regarding the operation of its business prior to the closing, and reciprocal indemnifications. Completion of the Merger is subject to the satisfaction of customary closing conditions as set forth in the Merger Agreement, including among other things, the adoption of the Merger Agreement and approval of the Merger by the MGI shareholders,
the consummation by the Company of a private placement to obtain working capital for the combined operations and the entry into employment agreements with the four executive officers of MGI.
The Company is entering into a placement agency agreement with a placement agent for a placement of $3,000,000 gross proceeds of the Company’s securities (the “Private Financing”). As of February 12, 2008, the Company had non-binding commitments for part of the Private Financing, and is working to raise the remaining amount. The terms of the Private Financing are subject to negotiation among the Company, the placement agent and the prospective investors. The securities to be offered in the Private Financing will not be registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or an applicable exemption from registration. At the closing of the Merger, the Company will enter into a Registration Rights Agreement with the MGI shareholders providing them with “piggyback” registration rights for the Company Common Stock issued to them on the Merger. It is anticipated that the Company will enter into a registration rights agreement with the investors for the Company Common Stock in the Private Financing.
NOTE K – ACQUISITION OF XSVOICE, INC.
On January 6, 2006, the Company completed the purchase of XSVoice, Inc., a privately held wireless platform and application developer, by acquiring substantially all of the assets of XSVoice, Inc. for a total purchase price of $6.3 million. XSVoice, Inc.’s results of operations have been included in the consolidated financial statements since the date of acquisition.
As a result of the acquisition, the Company acquired XSVoice's proprietary SWInG (Streaming Wireless Internet Gateway) technology, which enables mobile access to virtually any type of audio content, including Internet-based streaming audio, radio, television, satellite or other audio source. The acquisition also allowed the Company to gain access to carrier distribution channels and premium content provider relationships.
The aggregate purchase price of $6,393,223 consisted of $198,829 in cash consideration, the assumption of $130,000 in debt, and common stock valued at $5,735,000. In addition, the Company paid $80,820 for accounting and legal fees related to the acquisition and issued common stock valued at $265,074 for investment banking services.
The value of the 2,362,830 common shares issued as a result of this acquisition was determined based on the average market price of the Company’s common shares over the preceding 15-day period before the closing date of the acquisition.
The following table presents the allocation of the acquisition cost, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed, based on their fair values:
Of the $6,402,902 of acquired intangible assets, $1,345,040 was assigned to the SWinG technology platform, $104,000 for customer relationships, $78,000 for employment contracts, and $84,500 for supplier contracts. These intangible assets were assigned a life of 45 months. The remaining unallocated intangible balance of $4,791,362 was assigned to goodwill. The Company recognized $84,065 and $150,690 in amortization expense for the quarters ended December 31, 2007 and 2006, respectively.
The following discussion should be read in conjunction with the Financial Statements and related notes thereto included elsewhere in this report.
INTRODUCTION
UpSNAP, Inc. and its subsidiaries are collectively referred to as UpSNAP. The following Management Discussion and Analysis of Financial Condition and Results of Operations was prepared by management and discusses material changes in UpSNAP’s financial condition and results of operations and cash flows for the quarters ended December 31, 2007 and 2006. Such discussion and comments on the liquidity and capital resources should be read in conjunction with the information contained in the accompanying audited consolidated financial statements prepared in accordance with U.S. GAAP.
The discussion and comments contained hereunder include both historical information and forward-looking information. The forward-looking information, which generally is information stated to be anticipated, expected, or projected by management, involves known and unknown risks, uncertainties and other factors that may cause the actual results and performance to be materially different from any future results and performance expressed or implied by such forward-looking information. Potential risks and uncertainties include risks and uncertainties set forth under the heading “Risk Factors” and elsewhere in this Form 10-QSB.
OVERVIEW
UpSNAP provides a mobile search and entertainment platform that enables media companies to deliver their content to all mobile phones in the United States, and generates revenue primarily from subscriptions and increasingly from mobile advertising. UpSNAP has searchable mobile content from over 1,000 content channels and over 150 content partners. In April 2007, UpSNAP also launched a multi-media search engine that allows consumers to search for mobile content, such as ringtones, and mobile videos, from their PC desktop.
Mobile consumers are now buying more and more powerful phones with Internet features capable of sending email, running applications and browsing the Internet. According to the Pew Wireless Internet Access study in February 2007, as many as 25% of Internet users now have a cell-phone able to access the Internet. In the key youth demographic of 18-34, consumers are using their cell-phones as their primary method of communication and entertainment– effectively replacing their PC.
The market in general for mobile services is continuing to show very high growth rates. In the U.S, according to the Cellular Telecommunications & Internet Association (CTIA), as reported in its Wireless Quick Facts December 2006, wireless subscribers reached 233 million by December 2006, reaching more than 76% of the total U.S. population.
Now that the number of subscribers has almost reached saturation point – particularly in the 18-35 demographic – we believe mobile operators are seeking to increase their revenues by offering mobile entertainment services. According to the CTIA, Mobile Entertainment Revenues in the US grew particularly sharply, showing growth of 82% from $4.8 billion in the first half of 2005, to $8.7 billion for the latter nine months of 2006.
In the past, the typical revenue model for mobile entertainment services has been a paid subscription model. Consumers have proved willing to spend several dollars on a 20 second ring-tone from a mobile carriers store, even when they can purchase the whole song on Apple’s iTunes for a mere 0.99 cents on their computer, an example of the current large discrepancies between the mobile and Internet content pricing models. As the features of the Internet and PCs converge into powerful handsets with wireless Internet access, the Company predicts that these discrepancies cannot last for long.
The global market for mobile-phone premium content is expected to expand to more than $43 billion by 2010, rising at a compound annual growth rate of 42.5 percent from $5.2 billion in 2004, according to iSuppli Corp.
UpSNAP management believes that this paid content subscription model will start to migrate to a search and advertising driven model over time. Most mass media business models have started as subscription only, and then migrated with the increasing reach of consumers into advertising driven services. As John Templeton said: “History never repeats itself, but it often rhymes.”
In the United States, most mobile content is sold from ‘virtual’ shops on the mobile handsets. However, this trend is set to change. In Europe, the mobile operators are leaving content choice and selection to media and distribution companies who sell mobile content. Consumers in the US are now being increasingly exposed to direct marketing for mobile products.
UpSNAP has built a search and advertising driven business model, which enables UpSNAP and its media and carrier partners to make money from advertising, rather than from the content subscription. UpSNAP believes that it is very well positioned to take advantage of the enormous consumer demand for mobile content and entertainment. A 2006 study from Shosteck Group showed that revenues from Mobile advertising could reach $9.6 billion by 2010. Consumers will also increasing need quick and convenient ways to search for all the latest content they can consume on their mobile phone.
UpSNAP currently has one major distribution arrangement, and in order to increase sales, UpSNAP must increase its media partnerships that can actively promote offers direct to consumers, as well as continue to partner with as many of the mobile operators as possible.
In 2007 UpSNAP signed a contract with Lincoln Financial which enables consumers to listen and search for popular shows such as the Bob and Sheri Show on demand from their mobile phones. UpSNAP has also recently signed new distribution partnerships with Cablevision, Go2 Media, and Interop Technologies.
In January 2006 UpSNAP derived 99% of its revenues from subscription revenue from one major US mobile operator. In our fiscal quarter October – December 2007, our dependency on this carrier has been reduced to approximately 82% of our revenues, as we move towards the more lucrative and higher margin search and advertising related revenues.
Media companies and Advertising Agencies are hopeful that mobile advertising can obtain the massive reach numbers of a TV campaign, combined with the direct response and tracking potential of the Internet. However, mobile marketing is still in its infancy as they struggle with the right forms of direct marketing, privacy issues, and how to structure mobile advertising deals. The pace of our deal making activities with the media companies has been much slower than we would have liked.
UpSNAP is looking at acquisitions to push this process quicker. We have now entered into a Merger Agreement with Mobile Greetings Inc. that could allow us to increase our average revenue per subscriber as well as our distribution channels.
If the MGI merger is consummated, we believe that the merged company would combine UpSNAP’s voice and advertising platforms with MGI's data platform to provide one scalable platform integrating content and advertising delivery to all mobile phones in the US. We believe that together the companies would be well positioned to take advantage of a large growth opportunity for mobile content and advertising based services, would add advertising inventory into our portfolio, and would allow us to publish comprehensive mobile solutions for our partners maximizing every mobile revenue earning opportunity. The combination of two scalable, automated audio and data platforms that work across all mobile handsets would give the Company a powerful set of applications and revenue streams. Our media partners would be able to advertise direct to consumer mobile services and products that will work on any mobile handset in the US. Media companies have been reluctant to advertise mobile products that only work on a small portion of their target audience’s mobile handsets. UpSNAP will be well positioned through our pay-per-call and premium voice platform integrated into our suite of digital applications. Meanwhile, on-deck branded apps will continue to be very important to the Tier 1 mobile operators, (AT&T, Verizon, Sprint/Nextel) especially as they increasingly view themselves as media companies.
We believe that the combined companies will address several of the weaknesses in the Company’s present business and operations, as well as playing to the strengths of our existing advertising platform. The merged company would have the following benefits:
· Reduce our reliance on Sprint/Nextel, and expand our distribution into all US network operators, particularly with Verizon. Our reliance on Sprint/Nextel should be reduced from 89% of revenues in fiscal Q4 2007, to less than 30% after the MGI Merger.
· Offer mobile products to any phone in the US using both voice and data services which will allow our media partners to advertise service direct to the consumer, increasing our overall sales and distribution to the consumer.
· Increase revenues and improve margins from advertising using MGI’s existing inventory and our extended media relationships direct to the consumer
· Improve the ability of the joint company to market our services to the mobile operators and large media operators which are demanding to deal with larger players who can handle all the mobile needs.
We believe that there is an excellent opportunity for a roll-up of wireless content providers. Mobile operators and media players are demanding to deal with larger players and both UpSNAP and Mobile Greetings have built platform that scale very well across all carriers and networks - allowing us to aggregate and partner with a wide cross-section of wireless services. Potential wireless acquisition targets would include mobile marketing, loyalty schemes, advertising, mobile promotions & mobile social networking
We continue to look for acquisition targets although it will be challenging consummating an acquisition due to the timing and availability of appropriate acquisition opportunities and our ability to find capital to acquire the same and provide working capital.
Principal Products and Services
UpSNAP has two principal products and services:
| | | Mobile Entertainment Services – responsible for 87% of first quarter fiscal 2008 revenues |
| | | Mobile Search Engine and Advertising Platform – responsible for 3% of fiscal 2007 revenues |
MOBILE ENTERTAINMENT SERVICES
The UpSNAP SWinG (Streaming Wireless Internet Gateway) platform enables mobile access to virtually any type of live and on-demand streaming audio content, such as radio, podcasts and live sports events. The software translates data from almost any type of common audio format, for example MP3 files, to allow it to be streamed to cell-phones capable of supporting audio streaming. If the cell-phone does not have any data services, the platform broadcasts the audio via the voice channel on the cell-phone. The SWinG platform runs on any mobile phone in the US, regardless of handset, data package or software. The SWinG platform was built over the course of 2002-2004 and is fully operational.
Our catalog of free and premium streaming audio content delivers compelling content from some of the world’s premier brands including Sporting News Radio, Lincoln Financial’s Bob and Sheri show, Troy Aikman show, Tony Bruno show, Inside Track Show (NASCAR), & Batanga (Hispanic Music). The catalogue of content includes over 1,000 content providers, with a wide selection of content ranging from Radio Stations, to sports coverage and Podcasts. UpSNAP also developed a prototype mobile dating service with Hot-or-Not and recently signed distribution agreements include, Go2 and Cablevision.
The company generates subscription revenues from the SWinG platform by providing the technology platform to major companies that already have a relationship with the carriers. In addition, the Company generates revenues acting as the principal in the relationship with the carriers, providing content from over 1,000 content providers.
The subscription revenues are primarily generated from recurring Subscribers, Consumers subscribe to a service on a monthly basis. For example, in the case of the Sporting News Radio content, consumers pay $4.99 per month. The cost of the paid service is added to the consumer’s phone-bill, and the carriers pay UpSNAP after deducting their margin and associated costs.
MOBILE SEARCH ENGINE AND ADVERTISING PLATFORM
UpSNAP has expanded its search engine suite to enable consumers to search for a wide variety of mobile content, services and data. In April 2007 UpSNAP launched a mobile Meta search tool that finds mobile data stored on the Internet. Mobile consumers can search for ringtones, mobile video content, mobile games, and other images, wallpapers and multi-media content from their PC. This service is accessible at http://www.upsnap.com/
The suite of mobile search products allows consumers to find and access mobile content and service from any mobile phone in the US. The UpSNAP mobile search engine platform allows consumers to search via text message, WAP, or through
Interactive Voice Response (IVR) by simply texting a keyword to a “short-code” or 5 digit telephone number, which in our case is 2SNAP (27627). Current services include yellow pages directory assistance, sport shows and content, horoscopes, comedy, weather, calorie counter, spelling, and airline travel information. Consumers type in search requests e.g. “Leo” for a text horoscope. The consumer will then be offered a free horoscope, along with an advertisement to speak with an astrologer direct or hear an extended audio horoscope. While the service is free, sponsored by advertising, carrier charges may apply, depending on the consumer's contract.
Similarly, consumers looking for sports content, for example, will receive a text message advertising UpSNAP premium sports services. The short-code can also be used for Premium Text Messaging Services (PSMS) which are subscription based services directly billed by the carriers, and included on the consumer’s phone bill. UpSNAP has PSMS services provisioned for billing with most of the major US carriers including, AT&T, Sprint/Nextel, T-Mobile and Alltel. These short-codes at present will only work on US handsets, limiting the geographic coverage of the service to those areas in the United States with cell-phone coverage. Our mobile search engine was launched live to consumers in November 2005.
These searches are free to use by the consumer – save for any communications cost incurred by their cellular phone usage according to their carrier contract.
UpSNAP generates revenues from advertisers who value the direct response pay-per-click model of the Internet, and now want the same model to work on mobile devices.
Once a consumer makes a search for a specific search category or uses a “key-word’ identified and purchased by an UpSNAP partner as indicative of buying behavior, the UpSNAP advertising platform inserts a “paid’ advertising listing into the search reply.
UpSNAP has a Voice Over Internet Protocol (VoIP) switch which seamlessly bridges the merchant telephone number with the consumer via a call connect. Our Pay Per Call advertising platform can then record the number of calls received by a merchant and produce an audit trail for a billing engine. UpSNAP partners with specialized “Pay-Per-Call” companies, that sign-up advertisers nationwide throughout the US for this type of advertising.
Our Pay-Per-Call advertising platform technology was built in 2005, and our first pay-per-call-partnership was announced with Ingenio, who provides pay-per-call advertisers nationwide on May 4, 2006. We rely on third party operators for our advertising. For example if a national pizza chain were to only want to target select US cities, our third party partners would only pass us the advertising for a specific geographical locale. Since then, UpSNAP has signed up a several more advertising partners, including AdValient, Third Screen Media, and Millennial Media.
Pay-Per-Call advertising is receiving a much higher margin than pay-per-click on the Internet. The average price of a pay-per-click on Google according to the Wall Street Journal was .50 cents. Pay-Per-Call, which directly bridges a consumer who is looking to buy on his cell-phone with a merchant, starts at $2 dollars a call, and goes up considerably depending on the nature of the sale.
DISTRIBUTION AGREEMENTS
UpSNAP’s revenues are directly affected by its distribution agreements. The distribution of our content occurs in one of two ways:
| | 1. | Carrier or “on deck” promotion – where the carrier actually promotes the service from the menu’s on the carrier handset, bills the consumer on his mobile phone bill, and takes its cuts, and then remits the balance to UpSNAP. UpSNAP has ‘on deck’ agreements with Sprint/Nextel. Recently, UpSNAP signed an “on deck” distribution agreement with Go2, one of the largest pure play mobile internet traffic sites in the USA. go2MediaTM, a company focused on the growing user demand for more localized, personalized mobile content. The goal is to further integrate UpSNAP’s vast audio services into the go2 mobile portal for the benefit of go2’s base audience of millions of U.S. mobile consumers. The initial offering utilizes go2’s one-touch calling feature to provide mobile users with quick access to audio recordings of current sports stories, scores and news. The recordings are updated several times a day. |
| | 2. | Off Deck Promotion – where the consumer signs up for services through media partner promotions, internet advertising, affiliate marketing relationships, or other media channels directly, and payment is made via a short-code or Premium SMS (PSMS) to the consumer’s mobile phone bill. UpSNAP has billing relationships in place with most major US carriers including, AT&T, T-Mobile, Sprint/Nextel and Alltel. Current Off deck partners include, Lincoln Financial and Sporting News, as well as recently added: Cablevision’ News12 service and Interop Technologies. Interop Technologies is a leading provider of advanced wireless technology solutions. The goal is to incorporate UpSNAP’s extensive audio services that will reach more than one million customers. Cablevision’s, News 12 Networks goal is to enable Cablevision customers to receive real time news on demand, traffic and weather for the seven coverage areas surrounding New York City via their cell phones. |
Margins
The revenue stream from the consumer is shared across several parties:
The wireless carrier, who operates the cellular infrastructure and billing interface to add micro-payments from wireless services onto the customer phone bill. The carrier will typically demand 30-50% of the gross revenues. UpSNAP reports revenues net of the carrier gross margin. For example, if UpSNAP sells an application for $10.00 to the consumer, UpSNAP would only report $5-$7 of net revenue.
An aggregator or mobile delivery and clearing house for the receipt and delivery of mobile messages will take 5-10% of the gross sale value
The content owner who has the rights to the mobile content.
The mobile supplier, in this case UpSNAP reports net revenue after the carrier and aggregator have taken their cut of 30 -60%. In turn, UpSNAP’s average pay-out to content providers is 30% of the net revenue.
UpSNAP’s margin improves considerably on advertising related services such as banner ads, audio ads, and Pay-per-call advertising. For these services, UpSNAP receives net revenue from an advertising partner. When UpSNAP deals directly with the media companies, the wireless carriers do not share in this revenue.
SELECTED FINANCIAL INFORMATION
In thousands (000’s) except for per share amounts
| | | Quarter Ended December 31, | |
| | | 2007 | | | 2006 | |
| Net revenue | | $ | 212 | | | $ | 251 | |
| Net income (loss) for the quarter | | $ | (80 | ) | | $ | (416 | ) |
| Net income (loss) applicable to common shareholders | | $ | (80 | ) | | $ | (416 | ) |
| Basic and diluted income (loss) per share | | $ | (0.00 | ) | | $ | (0.02 | ) |
| Total assets | | $ | 5,934 | | | $ | 6,111 | |
| Shareholders’ equity | | $ | 5,649 | | | $ | 5,880 | |
RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2007 COMPARED WITH THE QUARTER ENDED DECEMBER 31, 2006
In thousands (000’s)
| | Quarter Ended December 31, | |
| | 2007 | | | 2006 | |
| Sales | $ | 212 | | | $ | 251 | |
| Cost of Sales | | 98 | | | | 127 | |
| Gross Profit | | 114 | | | | 124 | |
| Product development | | 23 | | | | 86 | |
| Sales and marketing expenses | | 19 | | | | 29 | |
| Stock based compensation | | 14 | | | | 23 | |
| General and administrative | | 168 | | | | 251 | |
| Amortization expense | | 84 | | | | 151 | |
| Total Expense | | 308 | | | | 540 | |
| Net operating loss | | (194 | ) | | | (416 | ) |
| Net Other Income | | 114 | | | | 0 | |
| NET LOSS | $ | (80 | ) | | $ | (416 | ) |
Revenue. The sale of mobile entertainment services accounts for 87.3% of UpSNAP’s first quarter 2008 revenues.
The composition of revenue in thousands ($000’s), except for units, is as follows:
| | | Quarter Ended December 31, | |
| | | 2007 | | | 2006 | |
| Wireless data services | | $ | 185 | | | $ | 246 | |
| Advertising and other | | | 27 | | | | 5 | |
| Revenue | | $ | 212 | | | $ | 251 | |
Cost of goods sold. Cost of revenues for the quarter ended December 31, 2007 were $98,000, resulting in a gross profit of $114,000 (53.8%) compared to cost of revenues for the quarter ended December 31, 2006 of $127,000 and a gross profit of $124,000 (49.4%). Costs of revenues were primarily fees paid to the Company’s content providers; royalty payments for the music content, server farm, and call connect charges.
Product development expenses. Product development costs consist primarily of salaries and related expenses for product development personnel as well as the cost of independent contractors. Product development expenses for the quarter ended December 31, 2007 decreased by $63,000, or 73.3%, compared with the same period in 2006. Product development expenses decreased primarily due to the elimination of product development headcount. Product development expenses are expected to remain at current levels for the next several quarters.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and related expenses for marketing personnel as well as the cost of public relations efforts. Sales and marketing expenses for the quarter ended December 31, 2007 decreased by $10,000 or 34.5%, compared with the same period in 2006. Sales and marketing expenses decreased primarily due to the elimination of marketing headcount and reduced public relations spending. Sales and marketing expenses are expected to remain at current levels for the next several quarters.
Stock based compensation expenses. Stock based compensation expenses consist of expenses related to the Company’s granting of stock options and restricted shares. Stock based compensation expenses are expected to remain at current levels for the next several quarters.
General and administrative expenses. General and administrative expenses consist primarily of salaries and related costs for personnel as well as professional fees for legal, audit, and tax services. General and administrative expenses for the quarter ended December 31, 2007 decreased by $83,000, or 33.1%, compared with the same period in 2006. General and administrative expenses decreased primarily due to the elimination of headcount and reduced spending for audit fees and travel. The Company deferred half of the salary of its executive officers for January 2008 and has been accruing the service fee for the Company’s CFO since October 1, 2007.
Amortization of intangibles. Amortization of intangibles for the quarter ended December 31, 2007 was $84,000 compared with $151,000 in 2006. Amortization expense is related to the value assigned to the intangible assets resultant from the XSVoice acquisition. During fiscal 2007 the intangible asset value assigned to employment agreements, supplier agreements, and customer relationships became fully amortized.
Other Income and expense. For the quarter ended December 31, 2007 the Company recognized $114,000 in income related to the extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our cash needs from inception through December 31, 2007 with the $2,146,200 in funds acquired as part of the September – October 2005 Private Placement. In addition, the Company raised $254,750 in February 2007 from the sale of 619,000 Series A warrants and 400,000 Series B warrants at $0.25 each.
Liquidity. At December 31, 2007, UpSNAP had cash and cash equivalents of $16,000, compared with $19,000 at September 30, 2007, a decrease of $3,000.
During the quarter ended December 31, 2007, cash used to fund operating activities was $65,000, consisting primarily of the net loss for the period of $80,000 offset by non-cash charges related to:
| · | amortization and depreciation charges of $84,000 and $7,000, respectively; |
| · | write-off of debt of $113,000 |
| · | stock based compensation of $14,000; and |
| · | working capital changes of $153,000, consisting primarily of a decrease of $117,000 in accounts receivable, and an increase of $20,000 in accounts payable. |
Investing activities for the quarter ended December 31, 2007 used cash of $69,000 in costs related to the pending MGI merger.
The Company has entered into placement agency agreements with placement agents for a placement of at least $3,000,000 in gross proceeds of the Company’s securities. The terms of the private financing are subject to negotiation among the Company, the placement agents and the prospective investors. The closing of the merger agreement with MGI is dependent on the successful completion of this private financing.
As of February 12, 2008, the Company had non-binding commitments for up to $1,500,000 in the private financing, and is working to raise the remaining $1,500,000 to close the MGT merger for a total of $3,000,000 in gross proceeds.
This private financing has not been consummated as of the date hereof and the Company offers no assurances that the private placement will close. The inability to close the private placement will cause the termination of the MGI Merger. Even if completed, the placement terms may be highly dilutive to current stockholders, and may impose debt service obligations on the Company. We anticipate that the private financing and the merger will be consummated, if at all, during the second quarter of fiscal 2008. Either UpSNAP or MGI may currently terminate the merger agreement upon providing notice to the other party.
Without the completion of the private financing, the Company will not have sufficient cash to fund future operations. At the date of this report we are continuing to incur losses. We are using capital of approximately $25,000 per month to fund
operations. At this rate we would require $300,000 of capital over the next twelve months to fund current operations. We had cash in the bank of $72,000 as of February 8, 2008 and a working capital deficit. If the private financing is not closed during the second quarter of fiscal 2008, the Company will need to sharply reduce operations and may no longer be able to continue as a going concern.
We are continuing to explore various financing alternatives, including equity financing transactions. Equity financings would likely include, but are not limited to, private investments in public equity (PIPE) transactions or strategic equity investment by interested companies. Corporate collaborations could include licensing of one or more of our products for upfront and milestone payments, or co-development and co-funding of our products.
Our long-term working capital and capital requirements will depend upon numerous factors, including the following: our ability to close and successfully integrate the Mobile Greetings Merger; and our general efforts to improve operational efficiency, conserve cash and implement other cost conservation programs.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
UpSNAP’s management makes certain assumptions and estimates that impact the reported amounts of assets, liabilities and stockholders’ equity, and revenues and expenses. These assumptions and estimates are inherently uncertain. Management judgments that are currently the most critical are related to revenue recognition, valuation of goodwill and stock based compensation. Below we describe these policies as well as the estimates involved. For a more detailed discussion on accounting policies, see the notes to the audited consolidated financial statements.
Revenue recognition
The Company recognizes revenue under the guidance provided by the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”).
The Company receives revenue from the wireless carriers by providing streaming audio content that the carriers make available to their mobile handset customers. UpSNAP generates revenues from this line of business in two distinct ways:
Provider of Technology Platform: UpSNAP provides technology to brands that have their own mobile distribution and revenue arrangements with the carriers. In this case, UpSNAP does not act as the principal in the transaction. The brands have their own relationships with the carriers and look to UpSNAP to provide the technology platform and service, while they retain the relationship with the consumer and set the pricing. In these cases, UpSNAP typically reports net revenues received from the carrier which are revenues after both carrier charges and content provider charges.
The Company negotiated a new contract with its largest carrier customer effective February 12, 2007 in which the carrier is no longer deducting content provider charges before submitting revenue to the Company. Under this arrangement, the content provider charges are the responsibility of the Company. The net effect of this new contract is that revenues and cost of revenues are increased by an identical amount to reflect the content provider charges.
UpSNAP is Principal Party: UpSNAP acts as the principal party in the content relationships. Specifically, UpSNAP has the relationship with the carriers, sets the re-sale price at which consumers buy the product, pays the content provider for the content, and builds the mobile application or service. In these relationships, the Company recognizes revenue based on the gross fees remitted by the carrier to the company. The Company’s payments to the third party content providers are treated as cost of sales.
The Company also receives advertising revenues from third parties. These revenues are resultant from audio ads played on the Company’s SWInG platform, banner ads on the WAP deck, and pay per call revenues when the consumer proactively responds to a text message. These advertising revenues are recognized in the period the transactions are recorded by the third party provider. UpSNAP reports net advertising revenues received from third parties.
Valuation of goodwill
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” UpSNAP reviews the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in revenue and/or profits, changes in technology, significant litigation or other items.
UpSNAP performs an impairment test of goodwill, at least annually. At December 31, 2007, in evaluating whether there was an impairment of goodwill, management compared the carrying amounts of such assets with the related enterprise value. Enterprise value was used to measure the value of the goodwill. Estimates of the enterprise value at December 31, 2007 were determined by calculating the weighted average closing price of the stock for the quarter. This calculated enterprise value was then compared to the carrying value of the net assets of the Company. Upon completion of its goodwill impairment test, UpSNAP determined that the amount of the XSVoice goodwill was not impaired.
Stock Based Compensation
| Expected volatility | 70.0% |
| Expected dividends | 0% |
| Expected terms | 6.0 -6.25 years |
| Pre-vesting forfeiture rate | 50% |
| Risk-free interest rate | 4.45% – 4.76% |
The expected volatility rate was estimated based on historical volatility of the Company’s common stock over approximately the fourteen month period since the reverse merger and comparison to the volatility of similar size companies in the similar industry. The expected term was estimated based on a simplified method, as allowed under SEC Staff Accounting Bulletin No. 107, averaging the vesting term and original contractual term. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate was based upon plan to date experience. As required under SFAS No. 123(R), we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
OUTSTANDING SHARE DATA
The outstanding share data as at December 31, 2007 and 2006 is as follows:
| | | Number of shares outstanding | |
| | | 2007 | | | 2006 | |
| Common shares | | | 22,720,324 | | | | 21,151,324 | |
| Options to purchase common shares | | | 870,000 | | | | 700,000 | |
| Warrants to purchase common shares | | | 2,360,000 | | | | 5,144,668 | |
| Debentures convertible to common shares | | | - | | | | - | |
| Accrued interest convertible to common shares | | | - | | | | - | |
The 2007 reduction in warrants was primarily due to 1,019,000 warrants exercised during February 2007 and 1,765,668 warrants expiring March 31, 2007.
Risk Factors That May Affect Future Operating Results
You should carefully consider the risks described below, which constitute the principal material risks facing us. If any of the following risks actually occur, our business could be harmed. You should also refer to the other information about us contained in this report, including our financial statements and related notes.
Financial Risks
Our business has posted net operating losses, faces an uncertain path to profitability, and we have limited cash resources. For the investor, potential adverse effects of this include failure of the company to continue as a going concern. Our auditors have expressed substantial doubt about our ability to continue as a going concern.
From the inception of our operating subsidiary, UpSNAP USA, until December 31, 2007, UpSNAP USA has had accumulated net losses of $3,156,766. Our auditors have raised substantial doubt about our ability to continue as a going concern due to recurring losses from operations. In the 2007 fiscal year, we posted sales of $950,020 net of carrier charges from the sale of premium subscription services for mobile content. However, we expect to continue to have net operating losses until we can expand our sales channel and implement our marketing efforts. These continued net operating losses together with our limited working capital and the uncertainties of operating in a new industry make investing in our company a high-risk proposal.
We have limited cash resources and working capital. The private financing activity related to the merger with Mobile Greetings, Inc. may not be successful, leaving us with extremely limited resources.
We currently have monthly cash burn rate from operations of approximately $25,000 and have only approximately $16,000 in cash and a working capital deficit as of December 31, 2007. If the private financing is not successful, we will need to severely restrict its activities in order to conserve cash and may need to cease operations. We currently anticipate that the private financing will be consummated, if at all, during the second quarter of fiscal 2008. However, we can provide no assurances that the private financing will be consummated on terms favorable to us, if at all. Successful completion of the private financing depends on many factors, some of which are outside of our control, such as potential investors’ perception of the Company and our business and financial prospects, the proposed merger with MGI and the business and financial prospects of MGI and the combined company. In addition, MGI may terminate the merger agreement at any time.
Our business is difficult to evaluate because we have a limited operating history in a new industry. The adverse effects of a limited operating history include reduced management visibility into forward sales, marketing costs, customer acquisition and retention which could lead to missing targets for achievement of profitability.
UpSNAP is operating with a brand new business based around mobile entertainment services.
We expect to incur expenses associated with the planned expansion of our sales and marketing efforts and from promotional arrangements with our strategic partners. We expect that our future agreements and promotional arrangements with our strategic partners may require us to pay consideration in various forms, including the payment of royalties, license fees and other significant guaranteed amounts based upon revenue sharing agreements and the issuance of stock in certain cases. In addition, our promotional arrangements and revenue sharing agreements may require us to incur significant expenses, and we cannot guarantee that we will generate sufficient revenues to offset these expenses. To date, we have entered into revenue share relationships with carriers and content providers at industry standard margins, or enter into promotional arrangements to include guaranteed minimum payments. Based on management experience, future contractual arrangements will be based upon standard revenue share relationships at industry-standard margins. We cannot guarantee that we will be able to achieve sufficient revenues in relation to our expenses to become profitable. Even if we do attain profitability, we may not be able to sustain ourselves as a profitable company in the future.
We have limited resources to execute our business plan. The risk for investors is that the share price may suffer as better financed competition takes market share, or the company is forced to raise additional funds on unfavorable terms to the existing stockholders.
In September and October 2005, we raised $2,146,200 in a private placement transaction. As of the date of this annual report, we had approximately $11,000 in cash and cash equivalents. The Company’s current financial models indicate that the
Company’s cash balances have fallen to levels that will not sustain operations. Therefore, the Company is dependent on raising additional capital. We have no commitments for such capital.
Our closing share price at December 31, 2007 was $0.17 per share, so any additional capital raise will be highly dilutive.
Current funding limits our operating plan to a conservative one and our auditors have expressed substantial doubt about our ability to continue as a going concern. We will need additional funding to ensure that we are able to continue operating and compete in a dynamic and high growth mobile sector. Our financial resources are limited and the amount of funding that we will need to develop and commercialize our products and services is highly uncertain. Adequate funds to sustain operations and grow the business may not be available when needed or on terms satisfactory to us. A lack of funds may cause us to cease operations, or delay, reduce and/or abandon certain or all aspects of our product development programs. If additional funds are raised through the issuance of equity or convertible debt securities, your percentage ownership in us will be reduced, existing stockholders may suffer dilution. The securities that we issue to raise money may also have rights, preferences and privileges that are senior to those of our existing stockholders.
We anticipate that our results of operations may fluctuate significantly from period to period due to factors that are outside of our control, which may lead to reduced revenues or increased expenditures.
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control. Some of the factors that may affect our quarterly and annual operating results include:
| · | our ability to establish and strengthen brand awareness; |
| · | our success, and the success of our potential strategic partners, in promoting our products and services; |
| · | the overall market demand for mobile services and applications of the type offered by us; |
| · | the amount and timing of the costs relating to our marketing efforts or other initiatives; |
| · | the timing of contracts with strategic partners and other parties; |
| · | fees that we may pay for distribution and promotional arrangements or other costs that we may incur as we expand our operations; |
As a result of our limited operating history and the emerging nature of the markets in which we compete, it is difficult for us to forecast our revenues or earnings accurately.
Business Risks
We are dependent on strategic partners for content and sales distribution to consumers. If these partnerships were to cease, this could lead to loss of revenues and customers.
UpSNAP relies on the US mobile carriers Verizon, Sprint/Nextel, T-Mobile, and AT&T to sell its products and collect revenues which are then passed onto UpSNAP. Although management has no reason to believe that these arrangements are going to be adversely affected in the future, it is management experience that carrier contracts are prone to change and re-negotiation. UpSNAP also relies on the content developers to enter into commercially reasonable relationship with the company to allow for the re-selling of the content to consumers. UpSNAP has over 150 content partners and is not dependent on any one content supplier.
We are dependent upon our executive officers, managers and other key personnel, without whose services our prospects would be severely limited leading to loss of revenue and customer acquisition.
Our success depends to a significant extent upon efforts and abilities of our key personnel, in particular our Chief Executive Officer Tony Philipp. The loss of Tony Philipp could have a material adverse effect upon us, resulting in loss of current
business relationships, strategy and planning. Competition for highly qualified personnel is intense and we may have difficulty replacing such key personnel. UpSNAP has no key man insurance in place to help alleviate the loss.
The mobile entertainment services market in which we operate is subject to intense competition and we may not be able to compete effectively resulting in loss of revenues or customers.
We compete in the mobile entertainment services market. This market is becoming increasingly more competitive. We face competition from the existing mobile entertainment players, such as Google and Yahoo!, and newcomers to the mobile entertainment services markets. There are relatively low barriers to entry into the mobile entertainment services market. Many of our competitors or potential competitors have longer operating histories, longer customer relationships and significantly greater financial, managerial, sales and marketing and other resources than we do. We are particularly vulnerable to efforts by well funded competitors and will lose market share unless we can attain a critical mass of consumers, strategic partners, and affiliates, as well as strong brand identity.
UpSNAP is largely dependent on one strategic relationship. We need to significantly expand our distribution channels. Failure to expand our distribution channels will result in reduced customer acquisition, and reduced revenues.
In Fiscal 2007 substantially all of our revenues were generated from the Sprint/Nextel Distribution relationship. In order to decrease our dependence on one major US carrier, we need to enhance our ability to find new strategic partners in order to create additional distribution channels for our products and to generate increased revenues. We expect that we will need to invest on an ongoing basis to expand our partner sales force. The creation of strategic partnerships requires a sophisticated sales effort targeted at the senior management of prospective partners. Given our limited budget dedicated to this effort, we can only focus on a very limited number of distribution opportunities.
We plan to build our business through merger with or acquisition of existing technology companies but may not be successful in finding merger or acquisition partners. In addition we may need to seek additional finance to support the acquisitions. The financing and acquisitions will most likely involve the issuance of common stock, which may result in dilution of the current stockholders.
We plan to build our business through the merger with or acquisition of existing technology companies that will benefit our application service business. It is reasonable to expect that such activity will be an ongoing part of our business development efforts. At any given time, we could be in process of analyzing or making an offer for such a transaction. However, any discussion or speculation on specific transactions is only conjecture until such time that a definite agreement is signed and announced in an SEC filing. It is possible that no transactions will take place at all.
Acquisitions are difficult to find, close, and take a significant amount of management time.
Our intellectual property and other proprietary rights are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties which we may be unable to settle.
Our ability to compete effectively is dependent upon our ability to protect and preserve the intellectual property and other proprietary rights and materials owned, licensed or otherwise used by us. We currently have a patent-pending technology. We cannot assure you that the patent application will result in an issued patent, and failure to secure rights under the patent application may limit our ability to protect the intellectual property rights that the application was intended to cover. Although we have attempted to protect our intellectual property and other proprietary rights both in the United States and in foreign countries through a combination of patent, trademark, copyright and trade secret protection, these steps may be insufficient to prevent unauthorized use of our intellectual property and other proprietary rights, particularly in foreign countries where the protection available for such intellectual property and other proprietary rights may be limited. To date, we are not currently engaged in and have not had any material infringement or other claims pertaining to our intellectual property brought by us or against us in recent years. We cannot assure you that any of our intellectual property rights will not be infringed upon or that our trade secrets will not be misappropriated or otherwise become known to or independently developed by competitors. We may not have adequate remedies available for any such infringement or other unauthorized use. We cannot assure you that any infringement claims asserted by us will not result in our intellectual property being challenged or invalidated, that our intellectual property will be held to be of adequate scope to protect our business or that we will be able to deter current and former employees, contractors or other parties from breaching confidentiality obligations and
misappropriating trade secrets. In addition, we may become subject to claims against us which could require us to pay damages or limit our ability to use certain intellectual property and other proprietary rights found to be in violation of a third party’s rights, and, in the event such litigation is successful, we may be unable to use such intellectual property and other proprietary rights at all or on reasonable terms. Regardless of its outcome, any litigation, whether commenced by us or third parties, could be protracted and costly and could result in increased litigation related expenses, the loss of intellectual property rights or payment of money or other damages, which may result in lost sales and reduced cash flow and decrease our net income.
In order to be successful and profitable, we must grow rapidly. We expect that rapid growth will put a large strain on our management team and our other resources. We may not have sufficient resources to manage this growth effectively leading to potential loss of customers through poor service and support.
We anticipate that a period of significant expansion will be required to address potential growth in our customer base, market opportunities and personnel. This expansion will place a significant strain on our management, operational and financial resources. To manage the expected growth of our operations and personnel, we will be required to implement new operational and financial systems, procedures and controls, and to expand, train and manage our growing employee base. We also will be required to expand our finance, administrative and operations staff. Further, we anticipate that we will be entering into relationships with various strategic partners and third parties necessary to our business. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. Management may not able to hire, train, retain, motivate and manage required personnel for our planned operations.
Our business is subject to frequent technology changes, multiple standards, rapid roll-out of new mobile handsets, and changes in the method of Internet broadcasting delivery, that could lead to us being unable to provide our services to some our existing and new users, leading to loss of revenues, poor performance or both.
We are presently able to sell and deliver information to our product carriers throughout the world, but any changes in the method of delivery of Internet broadcasting or mobile communications standards, could result in our not being able to deliver our services to some or all of our customers. We will continue to develop our technology to address emerging mobile platforms and standards to avoid this problem, but no assurance can be given that this will be accomplished in a timely manner.
Some of our existing stockholders can exert control over us and may not make decisions that are in the best interests of all stockholders which could lead to a reduced stock price.
As of the date of this quarterly report, officers, directors, and stockholders holding more than 5% of our outstanding shares collectively controlled approximately 47.2% of our outstanding common stock. As a result, these stockholders, if they act together, would be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Accordingly, this concentration of ownership may harm the market price of our common stock by delaying or preventing a change in control of us, even if a change is in the best interests of our other stockholders.
In addition, the interests of this concentration of ownership may not always coincide with the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider. No officers or directors of UpSNAP are currently or have ever been affiliated with any of the other greater than 5% beneficial owners.
Market Risks
A limited public market exists for the trading of our securities, which may result in shareholders being unable to sell their shares, or forced to sell them at a loss.
Our common stock is quoted on the NASD Over-the-Counter Bulletin Board. Our common stock is thinly traded and has little to no liquidity. The stock has a limited number of market makers, and a limited number of round lot holders. As a result, investors may find it difficult to dispose of our securities. This lack of liquidity of our common stock will likely have an adverse effect on the market price of our common stock and on our ability to raise additional capital.
If an active trading market does develop, the market price of our common stock is likely to be highly volatile due to, among other things, the low revenue nature of our business and because we are a new public company with a relatively limited operating history. Further, even if a public market develops, the volume of trading in our common stock will presumably be limited and likely be dominated by a few individual stockholders. The limited volume, if any, will make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time.
The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ securities that have often been unrelated to the operating performance of these companies. Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
We do not intend to pay dividends to our stockholders, so you will not receive any return on your investment in our company prior to selling your interest in us.
We have never paid any dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. If we determine that we will pay dividends to the holders of our common stock, we cannot assure that such dividends will be paid on a timely basis. As a result, you will not receive any return on your investment prior to selling your shares in our company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our company and your shares may become worthless.
A significant number of our shares will be eligible for sale and their sale or potential sale may depress the market price of our common stock.
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. We have authorized 97,500,000 shares of common stock. As of December 31, 2007, we had outstanding 22,720,324shares of common stock. Accordingly, we have 74,779,676 shares of common stock available for future sale.
On August 9, 2007, we entered into an Agreement and Plan of Merger with Mobile Greetings, Inc., a California corporation, or MGI. Under the terms of the Merger Agreement, at the effective date of the Merger (the “Effective Date”), each issued and outstanding share of MGI common stock (other than any shares held in treasury and any shares as to which the holder has properly demanded appraisal of his shares under California law) will be converted into and exchanged for 9.68 shares (the “Exchange Ratio”) of the Company’s common stock, $.001 par value (“Company Common Stock”). Options, warrants and other rights to purchase MGI common stock as of the Effective Date will be assumed by the Company with an adjustment in the number of underlying shares and the exercise price thereof based upon the Exchange Ratio. The exchange concept is that the shares of Company Common Stock to be exchanged for MGI common stock on a fully diluted basis would equal 50% of the number of outstanding shares of Company Common Stock on a fully-diluted basis immediately after the Merger, and without giving effect to the private financing mentioned below. As of December 31, 2007, the number of shares that would be issued under this Merger Agreement would be 21,550,324 shares. On January 14, 2008, the Merger Agreement was amended to extend the termination date to February 28, 2008. Either party may terminate the Merger Agreement at any time.
In addition to the share consideration, the Company is to issue an Non-Negotiable Convertible Note (the “Note”) in the principal amount of up to $2,200,000 to a representative for the holders of the outstanding MGI common stock, options, warrants and other rights to purchase MGI common stock as of the Effective Date, repayable in 12 months subject to a six month extension should the Company then be working on a public offering, together with interest at the rate of federal funds payable at maturity or waived upon conversion. Commencing after six months, the Note would be convertible at a base conversion price of $.50 per share into shares of Company Common Stock, or an aggregate of 4,400,000 shares, subject to customary anti-dilution provisions.
In order to provide working capital for the combined company after the MGI merger, we are negotiating to raise up to $3 million in a private financing of convertible debt securities. The shares of Company Common Stock issuable upon conversion of such debt together with other Company securities issuable in connection with the private financing could be highly dilutive to current shareholders.
Under our 2006 Omnibus Stock and Incentive Plan, (the “Plan”) up to 7,500,000 shares of Company Common Stock, either unissued or reacquired by the Company, are available for awards of either options, stock appreciation rights, restricted stocks,
other stock grants, or any combination thereof. Eligible recipients include employees, officers, consultants, advisors and directors.
As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase, which could decrease its price. Some or all of the shares of common stock may be offered from time to time in the open market under Rule 144, and these sales may have a depressive effect on the market for our shares of common stock. In general, a person who has held restricted shares for a period of one year may, on filing with the SEC a notification on Form 144, sell into the market common stock in an amount equal to 1% of the outstanding shares for Bulletin Board Companies. Such sales may be repeated once each three months, and any of the restricted shares may be sold by a non-affiliate after they have been held for one year (after February 15, 2008).
Because our stock is considered a penny stock, any investment in our stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is a “penny stock” within the meaning of Rule 15g-9to the Securities Exchange Act of 1934, which is generally an equity security with a price of less than $5.00. Our common stock is subject to rules that impose sales practice and disclosure requirements on certain broker-dealers who engage in certain transactions involving a penny stock. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor.
In addition, the penny stock regulations require the broker-dealer to:
· deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;
· disclose commissions payable to the broker-dealer and the Registered Representative and current bid and offer quotations for the securities; and
· send monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account, the account’s value and information regarding the limited market in penny stocks.
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities. In addition, the liquidity of our securities may be decreased, with a corresponding decrease in the price of our securities. Our common stock in all probability will be subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
ITEM 3. CONTROLS AND PROCEDURES
Quarterly Evaluation of Controls. As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"). This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive Officer, Tony Philipp, and our Chief Financial Officer, Paul C. Schmidt (“CFO”). In addition, we have discussed these matters with our securities counsel and board. In this section, we present the conclusions of our CEO and CFO as of the date of the Evaluation with respect to the effectiveness of our Disclosure Controls.
CEO and CFO Certifications. Attached to this quarterly report, as Exhibits 31.1 through 31.4, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the quarterly report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more complete understanding of the topic presented.
Disclosure Controls. Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to us is made known to the CEO and the CFO by others, particularly during the period in which the applicable report is being prepared.
Scope of the Evaluation. The CEO and CFO's evaluation of our Disclosure Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this quarterly report. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to make modifications if and as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
Conclusions. Based upon the Evaluation, our Disclosure Controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO and CFO have concluded that our Disclosure Controls and procedures are effective at that reasonable assurance level to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.. Additionally, there has been no change in our internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls over financial reporting.
PART II – OTHER INFORMATION
The exhibits to this form are listed in the attached Exhibit Index.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | UPSNAP, INC. (Registrant) | |
| Date: February 14, 2008 | /s/ Tony Philipp | |
| | Tony Philipp Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | |
| Date: February 14, 2008 | /s/ Paul C. Schmidt | |
| | Paul C. Schmidt Chief Financial Officer (Principal Financial Officer) | |
INDEX TO EXHIBITS
| Exhibit No. | Description |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32 | |
* filed herein
